There has been a lot of talk lately about what’s next for the economy. With the fiscal cliff looming, and with the economy not quite recovered from the last recession, many are wondering where things might be headed next.

Leading vs. Lagging Economic Indicators

First of all, it’s important to identify whether you are looking at a leading indicator or a lagging indicator. As you might expect, leading indicators that point to where things might be headed. They show that things might be changing.

On the other hand, a lagging indicator is one that actually shows where the economy has already been. However, since it’s hard to pick out trends without seeing what’s already happened, these lagging indicators can be used to get an idea of, overall, what’s happening.

When you combing leading and lagging indicators, you can get an interesting picture of the economy. There are dozens of indicators that can be used to get an idea of what’s coming, and many people even choose to use their own common sense about what is going on around them to figure out whether or not it’s time to batten down the financial hatches ahead of an economic storm.

Common Economic Indicators

As you consider how a changing economy might affect your finances, here are some of the common indicators that you might run into while perusing financial media:

Employment (lagging): One of the most common pieces of economic data we use is the unemployment rate, as well as information about unemployment claims. Even though this is a lagging indicator, many people use this as an indication of how things are going — it’s a big one in determining trends, even though is debate over what the “real” rate is.

Retail Sales (leading): When retail sales are strong, many think that economy is headed in a positive direction. It means that consumers are buying things, and since consumer activity is a huge part of our economy, retail sales is considered Very Important as an economic indicator.

Housing market (leading): This is another leading indicator that gets a lot of attention. A look at whether home supply exceeds demand, and the type of housing inventory numbers there are, can provide an indication of where the economy is headed. Remember, just before the Great Depression, homes built far out-stripped demand, and soon skyrocketing prices plummeted. We saw something similar prior to the more recent housing market bubble’s burst.

Inflation (lagging): Even though CPI is used to make decisions about the future, it is a lagging economic indicator. Normally, inflation and deflation don’t show up until the economy is already heading in one direction.

There are plenty of other economic indicators, from manufacturing activity to income and wages to inventory levels to PMI to consumer sentiment. Even the stock market is sometimes viewed as an indicator of economic health. Watching this information can help you see which way the wind is blowing, and help you prepare for what might be coming.

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